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DAX Index Forms Island Reversal Pattern After Strong PMIs; What next?

X iThe DAX index is up by more than 1% as investors remain optimistic about the recovery of the global economy. The index is reacting to the upbeat German manufacturing and services PMI data, which signal that the German economy is recovering. The blue-chip index is trading at €12,421, with most companies being in the green.

German manufacturing and services sectors rebound

The DAX index is reacting to the flash manufacturing and services PMI data released by Markit. The numbers showed that the manufacturing PMI rose to 44.6 this month, a sign that companies are solidly back to business. This number matters because the manufacturing sector employs millions of people in Germany. Meanwhile, the services PMI number rose to 45.8 from the previous 32.6.

Meanwhile, in nearby France, the manufacturing PMI rose to 52.1 while the services PMI rose to 50.3. A PMI reading of 50 and above is usually a sign that the industries are expanding.

All these numbers are positive for the DAX index because its companies are among the biggest in Germany.

Meanwhile, investors are wary about the latest brawl between the European Union and China over the Hong Kong security law. In a statement, EU leaders urged Beijing to do a way with the law in order to boost the relationship. This matters because most companies in the DAX do a lot of business in China.

Top movers in the DAX index

The biggest gainer in the DAX index is Adidas, the sports retailer. The shares rose by 3.51% to €243 as investors hope that the recovery will boost spending on the firm’s products. It was followed by Wirecard, the troubled payment processor, whose share price has dropped by more than 80% in the past week. The company’s shares are up by more than 3% as investors place their hope on the recently announced restructuring plan.

Investors seem to hope that the sum-of-parts will be higher than the current total. The risk is that the company is deeply in trouble such that its customers may start looking for alternatives.

In all this, the biggest beneficiary could be Adyen, the Dutch payment giant. Other big gainers in the DAX index are Deutsche Post, Volkswagen, Heidelbergcement, and Continental. On the other hand, the worst performers in the index are Henkel, E. ON, Lufthansa, Beiersdorf, and Merck. They are all in the green.

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DAX Index technical analysis

The DAX index is still trading in the channel that we talked about yesterday. It is also trading above the ascending trendline that is shown in red. Also, the number is above the 50-day and 100-day exponential moving average. By being in the above-mentioned channel, it means that the index has formed the so-called island reversal channel, which is a sign that the index may decline in the coming days.

Still, a move above the upper line of €12,491 will see the index continue rising. If it does, bulls will now be targeting the next resistance at €12,800. On the other hand, a break below the support at €12,154 will see the index decline to the 61.8% retracement at €11,688.

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